Analysis Summary

The S&P 500 has made a sideways, turgid trough for the first 80 day component low of what is highly likely now the first move in an 18 month component that bottomed in October this year. Price is currently finding some support around the 80 day FLD (short term chart below), a typical interaction at this stage of the 40 week component (see trading strategy below).

At the long term the 18 month component, if it indeed did form in October, is running at around 15.4 months average wavelength over the period. This sets up the larger low, assumed to be the 4.5 year component, at the end of 2023 and into early 2024. That period, if the phasing is accurate, is likely to be tumultuous.

There has been general support around the 4.5 year FLD (orange on long term chart) for the most recent 18 month nominal low and this sets up a cross of that FLD for the downside target in due course. The medium term components (20 and 40 week) will now dictate the position of the cross and indeed the 20 week component is the one to watch into the new year for signs of continued bearish underlying trend. A move to test the lows around 3600-3700 is an ominous sign. Indeed the time frequency analysis below suggests a peak of the 20 week component has already occurred (calculated on average wavelength + average frequency modulation over the period). The move from this proposed 80 day nominal low may therefore be weak and generally sideways in nature.

Watch closely the interaction between price and the 18 month / 40 week FLDs in the coming weeks, shown on the Sentient Trader charts below. Price may well generally track or straddle the 40 week FLD on the down leg of the current 20 week component.

Here, from an early version our new analysis app, is the 20 week nominal component. Attenuation in the uptrend has given way to tremendous clarity over the last few iterations. Analysis is performed here on a time domain average version of price, comprised of series from the SPX, DJIA and RUT. A time domain average is a simple way to increase the signal to noise ratio when performing time frequency analysis and allows us to form custom composite indices.

One aspect that is little explored in time series analysis of financial markets is phase synchronisation or phase ‘clustering’. This is where peaks or troughs of periodic components line up in time. Above, the 2020 low exhibited a significant alignment and there have been smaller clusters recently at both the peaks and troughs.

Phasing Analysis

Sentient Trader

Utilising a pattern recognition algorithm and Hurst’s diamond notation

Time Frequency Analysis

Wavelet convolution targeting the 20 week nominal component

Trading Strategy

Interaction Status

Interactions and price in the FLD Trading Strategy (Advanced). This looks at an idealised 40 week cycle and an array of 3 FLD signal cycles. We apply the instrument’s phasing to the model and arrive at an overall summary for the interactions with the 20 day FLD, current and forthcoming.

Sigma-L recommendation: Risk Buy
Entry: 20 Day FLD
Stop: Below formed 80 day nominal low
Target: 4150 (18 month FLD resistance)
Reference 20 Day FLD Interaction: A2
Underlying 40 Day FLD Status: E
Underlying 80 Day FLD Status: B-C

Support as it stands is coming from the 80 day FLD (short term chart) in a typical fashion for the first 80 day component low in a 40 week cycle. The 20 week nominal peak will likely form in this first 40 day component and there is likely to be strong resistance at the 18 month FLD as we head into the new year.

The move to the 20 week nominal low, expected early February, will likely be the one to watch and a potential early short in this 18 month component.

FLD Settings

If you do not have the use of Sentient Trader use these settings to plot common FLDs in your trading software (daily scale) to more easily follow trading signals and strategy from Sigma-L.
Make sure to account for non-trading days if your broker omits them in the data feed (weekends, for example). The below offsets are given with no added calculation for non-trading days.
80 day nominal: 57.8 days | 29 day FLD offset
40 day nominal: 28.7 days | 14 day FLD offset
20 day nominal: 14.4 days | 7 day FLD offset
10 day nominal: 7.4 days | 4 day FLD offset

Correlated Exposure

A non exhaustive list of correlated instruments for consideration

SPDR S&P 500 ETF Trust
iShares Core S&P 500 ETF
Vanguard S&P 500 ETF
SPDR Portfolio S&P 500 ETF
Direxion Daily S&P 500 Bull 3X Shares
Direxion Daily S&P 500 Bear 3X Shares
ProShares UltraPro Short S&P500
ProShares UltraPro S&P500

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DISCLAIMER: This website/newsletter and the charts/projections contained within it are intended for educational purposes only. Results and projections are hypothetical. We accept no liability for any losses incurred as a result of assertions made due to the information contained within Sigma-L. This report is not intended to instruct investment or purchase of any financial instrument, derivative or asset connected to the information conveyed in the report. Trade and invest at your own risk.

S&P 500: Hurst Cycles - 13th December 2022